On June 1, Cairns Corporation purchased goods from a foreign supplier at a price of 1,000,000 francs and will make payment in three months on September 1. On June 1, Cairns acquired an option to purchase 1,000,000 francs in three months at a strike price of $0.852. Relevant exchange rates and option premiums for the franc are as follows: Date Spot Rate Call option premium for September 1 ( strike price $0.852) June 1 $0.852 $0.002 June 30 0.858 0.007 September 1 0.872 N/A Cairns must close its books and prepare its second-quarter financial statements on June 30.a. Assuming that Cairns designates the foreign currency option as a cash flow hedge of a foreign currency payable, prepare journal entries for these transactions in U.S. dollars. What is the impact on net income over the two accounting periods?b. Assuming that Cairns designates the foreign currency option as a fair value hedge of a foreign currency payable, prepare journal entries for these transactions in U.S. dollars. What is the impact on net income over the two accounting periods?
On June 1, Cairns Corporation purchased goods from a foreign supplier at a price of 1,000,000 francs and will make payment in three months on September 1. On June 1, Cairns acquired an option to purchase 1,000,000 francs in three months at a strike price of $0.852. Relevant exchange rates and option premiums for the franc are as follows:
| Date | Spot Rate |
Call option premium for September 1 ( strike price $0.852) |
| June 1 | $0.852 | $0.002 |
| June 30 | 0.858 | 0.007 |
| September 1 | 0.872 | N/A |
Cairns must close its books and prepare its second-quarter financial statements on June 30.
a. Assuming that Cairns designates the foreign currency option as a
b. Assuming that Cairns designates the foreign currency option as a fair value hedge of a foreign currency payable, prepare journal entries for these transactions in U.S. dollars. What is the impact on net income over the two accounting periods?
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